Integrated Manufacturing Systems

Emerald Article: Competitiveness strategies and AMT investment decisions

Peter G. Burcher, Gloria L. Lee

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To cite this document: Peter G. Burcher, Gloria L. Lee, (2000),"Competitiveness strategies and AMT investment decisions",
Integrated Manufacturing Systems, Vol. 11 Iss: 5 pp. 340 - 347
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Competitiveness strategies and AMT investment
decisions

Peter G. Burcher
Aston University, Birmingham, UK
Gloria L. Lee
Buckinghamshire Chilterns University College, Chalfont St Giles, UK

Keywords et al., 1997; Millen and Sohal, 1998; Lee et al.,

Competitiveness, Introduction 1999). This global research programme is led
Advanced manufacturing
technologies, Strategy, The potential benefits which can accrue from by Professor A.S. Sohal, Department of
Investment, Implementation, investments in advanced manufacturing Management, Monash University,
Evaluation technologies (AMT), have become Melbourne, Australia.
increasingly evident to UK companies, faced
Abstract
Examines the relationship with growing global competition (Swamidass
between competitiveness and Waller, 1991; Primrose, 1991; Small and Methodology
strategies and decisions to invest Chen, 1995). However, often substantial
in advanced manufacturing For the UK postal survey in 1996, a random
investments in the form of equipment,
technologies (AMT). Findings are sample was selected from the membership
presented from a survey of UK systems, software and hardware, aimed at
list of manufacturing practitioners in the
manufacturers, which is part of a improving manufacturing, have not resulted
Institute of Operations Management. The
global research programme on in the immediate tangible improvements in
AMT investments. Experiences of analysis was based upon 161 replies
performance intimated by suppliers or
four case companies are also used completed by personnel who ranged across
to illustrate factors driving these indeed anticipated by those within
several management levels from managing
investments and their outcomes. companies championing such investments
directors to systems or production managers.
Demonstrates how AMT (Boer et al., 1990). Similar experiences have
investments arise from a business Case studies were also undertaken in the
been echoed in other parts of the world and early part of 1997 using a structured
strategy seeking to improve
competitiveness. Although these many reasons have been offered to account interview technique. The companies, which
decisions are market-driven and for such disappointments (King and had already completed the survey, were
companies often use more than Ramamurthy, 1992; Sohal, 1996). One
one financial appraisal technique chosen to represent a cross-section of
important source of the problem has been manufacturing industry and a variety of
when evaluating a proposal, they
often cannot demonstrate the attributed to a lack of strategic thinking company sizes. The purpose of the case
tangible benefits anticipated from behind specific decisions to invest in AMT. studies was to provide a richer picture of the
their investments. This indicates This paper contributes to the debate by planning and implementation of AMT and to
that more time needs to be taken
reporting findings from a UK study of capture the views of those concerned
to carry out post-implementation
evaluation in order to be able to investments in AMT. Figure 1 sets out a regarding key lessons to be learned. The four
identify tangible benefits and learn conceptual framework of the AMT case companies are a pharmaceutical
from these experiences. investment process, which has guided the company with approximately 2,000
study. Here the focus is on what types of employees, a supplier of fuel injection
investment are being made, the approach to systems to the automotive industry with 300
the appraisal of AMT investment proposals, employees, a machine tool manufacturer
anticipated and actual benefits and concludes employing 126 people and an aerospace
with some of the implications of these component supplier with just over 100
experiences in terms of key lessons. employees.
The study of investment decisions amongst
UK manufacturers is part of global research
involving surveys of national samples in
Investments and competitiveness
Australia, New Zealand, South Africa, strategies
Singapore, Germany, Norway, Canada and
the USA (for a report of the UK project, see In the survey, all companies were asked to
Burcher and Lee, 1997; see also Sohal, 1995; answer questions in terms of the largest
Integrated Manufacturing Putterill et al., 1996; Sun investment in AMT made during the last
Systems three years. They were asked why they had
11/5 [2000] 340347 made this particular investment in AMT and
The current issue and full text archive of this journal is available at
# MCB University Press to indicate the importance to them of certain
[ISSN 0957-6061] http://www.emerald-library.com
broad issues, derived from the literature as
[ 340 ]
Peter G. Burcher and being forces which motivate such
Gloria L. Lee investments. Table I shows that, strategically,
Competitiveness strategies the main force driving these proposals was
and AMT investment
decisions reported as that of obtaining competitive
Integrated Manufacturing advantage, together with the financial
Systems benefits seen potentially to accrue from
11/5 [2000] 340347
making the investment. These results are
very similar to those found in surveys of
AMT implementations in Australia and New
Zealand (Putterill et al., 1996).
The majority of investments featured in
this study range from under a 250,000 to
those costing 1 million-5 million. Less than
10 per cent of the sample had committed
larger sums to one AMT project.
Investments were listed under computer
hardware, computer software and plant and
equipment and the survey shows that in
terms of the computer hardware, personal
computers are more likely to have been used
than mainframes or mini-computers. Local
area networks and shopfloor data capture
systems also often feature in the investment.
In terms of computer software, MRPII and
CAD/CAM are the most frequently cited,
followed by database management systems
and MRP. The types of plant and equipment
purchased are also quite varied, with
Figure 1
The AMT investment process
Table I
Reasons for AMT investment
Rank Mean scorea
Obtaining competitive advantage 1 1.70
Obtaining financial benefit 2 1.78
Countering competitive threat 3 2.39
Enhancing company image 4 3.20
Countering skill deficiency 5 3.56
Note: a Based on a Likert scale where 1 = ``most
important'' and 5 = ``not at all important''
investments in CNC machines in over 40 per
cent of the firms, followed by different types
of test equipment and about a quarter of the
sample having invested in flexible
manufacturing systems. Figure 2 illustrates
the range of investments made by the survey
companies.
It has been argued that strategic
considerations are critical to the success
of AMT implementations; if the initial
strategic analysis is faulty or omitted, the
likelihood of failure is high (Voss, 1986;
Badiru, 1990). In the current survey, 54
per cent of companies reported that the AMT
investment proposal had a high goodness
of fit with their corporate strategy, with a
further 43 per cent claiming a moderate fit.
This contrasts with findings from other UK
studies, where evidence had been found of
poor strategic vision for manufacturing
operations (Sweeney, 1994; Hill and
Westbrook, 1997).
Strategic visioning amongst the
case companies
The experiences of the four case companies
probed further the process of linking
competitiveness strategies with investments
in AMT. Each company completed a
competitive profile in which they evaluated
their own performance against market
requirements in terms of quality, cost,
delivery lead time, delivery reliability,
product features, flexibility, volume
variability, innovativeness and service to
customers. In discussing their profile,
management outlined the strategic
positioning and direction of their company,
illustrating how investing in AMT helps
them to become more competitive under
changing market conditions.
The largest case company, which is in
pharmaceuticals, produces bulk drugs and
formulated products in various forms. They
compete on quality, having innovative
products and service to the customer,
followed closely by delivery reliability. Like
all companies concerned with continuous
improvement, they are always searching for
ways to enhance performance, especially in
the fields of quality, delivery reliability and
service. AMT can assist in this process and
they have recently invested in wide and local
area networks and the consequent up-rating
of manufacturing planning and control
software. These investments are mainly
concerned with speeding up the process of
getting products to the market place by
providing fast access to more accurate
information. The networks concerned are
[ 341 ]
Peter G. Burcher and world-wide, linking all the group's global competition. The prime market
Gloria L. Lee pharmaceutical plants as part of a world- requirements for this company are quality,
Competitiveness strategies wide corporate IT strategy.
and AMT investment delivery reliability and innovative capability
decisions The second largest case company is an closely followed by cost, delivery lead time,
Integrated Manufacturing automotive component supplier whose product features and service. In evaluating
Systems largest customer accounts for around 70 per its own performance against these factors,
11/5 [2000] 340347 cent of its business. Three years before the the company considers that greatest
study, this original equipment manufacturer attention needs to be paid to its capacity to be
(OEM) was acquired by a competitor abroad, innovative. To a lesser extent there is still
which has exposed the case company to room for some improvement in quality,
delivery reliability, cost and the product
Figure 2
features they offer. They consider that this
AMT investments
will require further investment in human
and capital resources. In the other areas,
however, the company is already able to meet
market demands and in terms of flexibility
and volume variety, it exceeds current
requirements.
One of the AMT investments made in the
early 1990s was in a cell containing four
machining centres, a semi-automatic
assembly and a test rig facility. The strategy
driving this investment was to become more
innovative and obtain competitive advantage
by being able to go beyond offering just
throttle modules, to providing complete air
induction systems as well as the oil pump,
which is a sub-system in itself. This
investment enabled them to produce a shape
of product which they had not tackled before
and to cope with a very difficult volume
profile to meet a particular customer's needs
at that time.
The third case company is a major UK
manufacturer of machine tools which
produces twin spindle turning centres, multi-
spindle CNC automatic lathes and smaller
single spindle multi-slide automatic lathes.
The company has a sizeable machine shop
and several investments in Advanced
Manufacturing Technology have been made
in the past few years. The company's key
competitive priorities are quality, delivery
reliability, flexibility, volume variability and
service. Their evaluation of their own
performance against these market
requirements indicates that they achieve
high quality but that it sometimes ``costs
them money to get there''. They are also very
satisfied with their performance in terms of
delivery reliability and delivery lead time,
the latter having improved considerably
since they appointed a project manager to
take care of these issues. They have some
very good product features compared with
their competitors, and in terms of innovation
have sold specialist machines to Japan,
which is seen as ``taking coals to Newcastle''.
They can handle volume variability but see
flexibility and service as areas where there is
still room for improvements and, in terms of
[ 342 ]
Peter G. Burcher and cost control, acknowledge that they are not as
Gloria L. Lee good as they would wish to be.
Competitiveness strategies Their recent AMT investments in the form
and AMT investment
decisions of two CNC machining centres were driven
Integrated Manufacturing by the need to gain competitive advantage,
Systems improve quality, reduce work in progress,
11/5 [2000] 340347 increase through-put, improve the working
environment and reduce costs. This
investment provides them with more
flexibility, they can make small batches more
economically and can switch between
batches very quickly.
The smallest case company, an aerospace
component supplier, was founded 12 years
ago and has seen considerable growth,
especially in the 1990s. The key competitive
priorities for this company are quality,
delivery reliability and service, followed by
product features and flexibility. They
consider that currently their performance is
strongest in terms of delivery lead time,
product features in terms of offering a
comprehensive service and their flexibility
in responding to customer needs. The
company acknowledges that, although they
have all the quality assurance procedures in
place, the quality and delivery reliability
demanded by the market requires
continuous improvement.
As part of their growth strategy, they are
keen to differentiate themselves from their
competitors and consider that a key
distinguishing factor would be how
innovative they can be in the manufacturing
service that they provide. This means that
they are working to position themselves in
terms of the advanced planning techniques
which they deploy, the manufacturing
methods capabilities which they offer and
certain focused products at which they excel.
Their investment in a manufacturing
planning system was made in order to
support their growth strategy through
enhancing their competitiveness in the
marketplace. The strategy behind this
investment was about improving
information and sharing this information
throughout the company. It would improve
the integration of manufacturing
information systems and enhance their
methods of controlling the business, by
facilitating the capture of information and
the costing of activities. It would also enable
them to sell to customers on the basis of
having some advanced manufacturing
technology and enhance the company image
through, for instance, the production of
computer generated charts and information.
This was an ambitious decision, involving a
commitment of some 85,000 and driven very
much as an act of faith in the future of the
company, which at that time was working
with a turnover of just over 2 million and
about 32 employees. Being a small owner
managed company, they were able to make
the investment to support their growth
strategy, based more upon intangible than
tightly costed tangible benefits.
AMT investment appraisal
Within the wider survey, whilst most
companies make some attempt to evaluate
the financial benefits of major AMT
investments, many rely primarily on
unsophisticated techniques. For instance, the
use of the payback method and return on
investment are the most widely used
techniques for the financial assessment of
AMT proposals, with the payback method
ranked as the most important, as well as the
most widely applied technique. This reliance
on the payback method is found in surveys of
AMT implementation in other countries
(Putterill et al., 1996) and in the UK (Lefley
and Sarkis, 1997). The use of inappropriate
financial appraisal methods and short-
termism are some of the reasons that have
been put forward for the apparent lack of
investment in AMT in the past. Meredith
(1988) argues that capital acquisition policies
based on short-term financial/economic
measures have worked well for decisions
concerning capital equipment replacement
and expansion, but are myopic for AMT
projects. Short-termism is seen as part of
both the USA (Jacobs, 1991) and the UK
(Demirag and Tylecote, 1992; Lefley, 1994)
business cultures, where managers are under
both external and internal pressures to
produce short-term results.
However, in this study more than half the
companies rely upon the use of more than
one financial appraisal technique and where
this includes some form of discounted cash
flow analysis, then the criticism of short-
termism may not be so well founded. It
appears that companies assess AMT
proposals very carefully, taking account of
qualitative and quantitative factors and, with
over a third of companies, the financial
assessment of the proposal exceeded the
criteria normally expected for investments.
Amongst the case companies, approaches
to investment appraisal varied. With the
smallest case company, the aerospace
component supplier, no formal techniques
were applied. The joint managing directors
decided they wanted to invest in a
manufacturing planning system. They were
supported by their non-executive chairman,
who has an accounting background and was
attracted by the potential of the system to
facilitate information capture and costing
activities. The machine tool company relied
[ 343 ]
Peter G. Burcher and upon a payback period of four years, but
Gloria L. Lee considerable work went into identifying
Competitiveness strategies
and AMT investment work flow and product mix through the new
decisions machines to relate this to potential cost
Integrated Manufacturing savings. In the case of the pharmaceutical
Systems company, the decision to invest was taken
11/5 [2000] 340347
centrally as part of a worldwide corporate IT
strategy and so it did not involve the
operating companies in justifying the
investment. The automotive component
supplier, on the other hand, had to justify
their investment to their US parent
corporation, based upon payback, return on
investment and discounted cash flow
analyses. They had anticipated that approval
would be forthcoming, since it was within
their company's strategic plan and supported
agreed objectives to move into new areas of
business.
Post-implementation evaluation
It has been reported that many AMT firms
are not adequately measuring the
performance of their systems. It has also
been stated that if firms adopt these systems
for strategic purposes, they are often
evaluated on technical performance alone
(Primrose, 1991).
Survey companies were asked if they
carried out a formal post implementation
evaluation study but this had been
undertaken by only 22 per cent of the sample.
A further 30 per cent have yet to complete the
implementation and therefore were unable to
provide much information on this important
aspect of any investment. Where formal
evaluations did take place, they were most
likely to have been undertaken within three
months, but between three and 12 months
were still quite common time elapses.
With the four case companies, none of
them carried out what they saw as a formal
post-implementation evaluation procedure
but they still considered that they were
well aware of whether the investment
had been worthwhile. For instance, the
pharmaceutical company pointed out that,
although they did not carry out a formal
evaluation of their investment, the
manufacturing planning system was
reviewed several times by an outside
consultancy, before it was awarded MRPII
``Class A'' status. Top management at the
machine tool company explained that a
formal evaluation procedure, like those that
they had carried out when they worked for
large organisations, was a costly exercise
which could not be justified in a small firm.
They considered that they were well aware of
how viable the investment had proved to be
[ 344 ]
and took a very pragmatic view that ``if you
have spent the money and you have got to the
stage where you can look at everything, all
you can do is make it work for you''. The
automotive component supplier also
explained that they do not carry out a formal
procedure mainly for resourcing reasons.
Here the view was expressed that, if the
resources have gone in at the right time in
the project, there should be less need for post-
implementation evaluation, in the sense of
having a post-mortem. On the other hand, the
company are particularly concerned if there
is a quality or cost problem, which has then
to be driven right back through the process.
They also create best practice manuals, in
order to capture the learning which is taking
place with each project implementation.
Anticipated and actual benefits
When the survey companies were preparing
an investment proposal, the anticipated
benefits were articulated in terms of both
tangible and more intangible benefits. For
instance, reduced costs and increased
through-put can be readily measured.
Obtaining competitive advantage can be
demonstrated quantitatively through
reduced selling prices or faster delivery
times, but better management systems and
increased flexibility are more difficult to
quantify.
The survey firms ranked ``obtaining
competitive advantage'' as their primary
anticipated benefit and ``reducing costs'' were
ranked second. After implementation
however, the benefits most highly scored in
terms of achievement were ``enhanced
company image'' followed by ``improved
workforce attitudes'', with ``obtaining
competitive advantage'' and ``reducing costs''
coming far down the list. This suggests that,
in practice, whether or not they carry out a
formal evaluation after implementation, it
can be difficult to demonstrate quantitative
benefits which arise from a particular AMT
investment. Thus companies cite more
intangible aspects, like enhanced company
image or improved attitudes, as the most
significant gains that have arisen.
The machine tool case company, on
the other hand, even though no formal
evaluation procedure was conducted, was
able to cite certain tangible benefits from
their CNC machining centres investment, as
it formed a major element in their production
process and therefore figured in their weekly
returns. Benefits included cost reductions
and reductions in machine shop work in
progress values, through the ability to
Peter G. Burcher and produce smaller batches, together with a
Gloria L. Lee marked increase in flexibility. In contrast,
Competitiveness strategies
and AMT investment the aerospace component supplier could not
decisions demonstrate quantifiable tangible benefits
Integrated Manufacturing from their investment in a manufacturing
Systems planning system but was able to cite
11/5 [2000] 340347
intangible benefits associated with enhanced
management control, integration of
manufacturing information systems, more
information sharing, enhanced company
image, better sales information in the form of
graphs, etc. and information support for
growing the business.
The experiences of the case companies also
illustrate how unanticipated events can
intervene between anticipated and actual
benefits from an investment in AMT. With
the automotive component supplier, the
investment in the manufacturing cell did not
result in the order volumes originally
anticipated, due to changes in the customer's
strategy and organisation, as a result of being
acquired by another company. Nevertheless,
the case company considers that it has been a
moderately successful investment and a
number of intangible and some more tangible
benefits can be identified:
. enhanced company image;
. improved working environment;
. improved workforce attitudes;
. improved quality;
. improved ability to respond to variations
in suppliers' quality;
. overcoming existing skill deficiencies;
and
. overcoming production management skill
deficiencies.
With the pharmaceutical company,
essentially the benefits from investing in
wide and local area networks exceeded the
anticipated benefits. The project's original
expected pay-back period was between two
and three years, but because of the network
and systems structure in place, a business
opportunity was spotted which they were
able to respond to, which resulted in the
entire cost of the project being recovered in a
period of six weeks. In addition, it was
possible to identify tangible and intangible
benefits from this investment, including:
. increased staff productivity, i.e. they have
two new pieces of plant on stream
supported by the same number of staff;
. increased availability of information for
management decision making; and
. the fact that information systems staff are
now far more user-oriented and
commercially aware and work teams now
have far more control over their material
supply, scheduling and process control.
The company is now at the forefront of
technology and investments in AMT will
continue especially in areas of research and
development systems, particularly document
control and links with regulatory authorities.
This will allow a speeding up of new product
time to market, which is a core competitive
advantage in this industry.
Conclusions and implications
Through the experiences of companies which
took part in the survey of UK manufacturers
and the case studies of four of these
companies, this paper has explored why
companies invest in AMT, what types of
investment are being made, how investment
proposals are appraised and what are the
anticipated and actual benefits achieved.
The survey indicates that contrary to
indications from other UK studies (for
example, Sweeney, 1994; Hill and Westbrook,
1997), the majority of companies in this study
have thought through strategically the
investments they have contemplated. These
have been driven by competitiveness
considerations, as part of their wider
business strategy and articulated within an
overall manufacturing strategy. In other
words most have been market driven in their
investments, rather than technology driven,
i.e. going after the latest ``bells and whistles''
simply because they are out there and they
want to be seen as at the leading edge of
technology. The companies are more likely to
invest in systems based upon personal
computers than mainframes or minis, also
local area networks and shopfloor data
capture systems often feature in the
investment. MRPII and CAD/CAM are the
most frequently cited types of computer
software followed by database management
systems and MRP. Although the types of
plant and equipment are quite varied, over 40
per cent of the investments are in CNC
machines.
This paper argues that companies assess
AMT proposals carefully, taking into account
quantitative and qualitative factors.
Although the appraisal techniques used are
generally quite unsophisticated, relying
primarily upon the payback period and
return on investment, most companies rely
upon the use of two or more techniques.
There is no pattern of differentiation between
larger or smaller companies, between
industry sector or the size of the investment
being made, in terms of the number or types
of appraisal techniques employed by the
company.
[ 345 ]
Peter G. Burcher and Much less attention is given to post-
Gloria L. Lee implementation evaluation procedures once
Competitiveness strategies the investment has been made, as less than a
and AMT investment
decisions quarter of companies undertook this form of
Integrated Manufacturing evaluation. It was the larger turnover
Systems companies, particularly those in the process
11/5 [2000] 340347 industries which undertook this procedure
but the size of the investment apparently did
not affect the decision. It has long been
recognised in the organisation studies
literature that larger companies are
generally more formalised in their
procedures than smaller companies (Pugh,
1998). Also these companies are likely to have
more resources to devote to this type of
exercise. The views expressed in the case
companies indicate that they question the
cost effectiveness of going through such a
formal procedure, when they feel that they
are already aware of the benefits or
otherwise of the investment and in practical
terms they learn from these experiences,
whether they are good or bad.
Table II compares the ranking of
anticipated and actual benefits achieved by
the survey companies.
The lack of formal post-implementation
evaluation procedures amongst over three
quarters of the survey companies may
contribute to the trend of companies to cite
more intangible benefits after the investment
has been made, compared with the
anticipated benefits when the proposal is
being prepared. Thus whereas obtaining
competitive advantage and reduced costs
were the most highly ranked anticipated
benefits, these were replaced by enhanced
company image and improved workforce
attitudes when companies were asked to
rank the benefits actually achieved. The
experiences of two of the case companies also
illustrate how unanticipated events can alter
outcomes for better or for worse.
The literature has suggested that short-
termism characterises the business culture
in the UK and the USA but this charge does
not apply to all the companies in this study,
as 63 per cent of them used more than one
appraisal technique and 41 per cent used
discounted cash flow analyses, which
indicates a longer-term perspective on AMT
investments in these companies. Other
studies have also pointed to poor strategic
vision in manufacturing operations but most
of the companies in this study appear to be
very aware of the importance of aligning
their manufacturing strategy with their
business strategy. This point was strongly
endorsed by the case companies and indeed
two of them especially emphasised this as an
important lesson for all companies investing
in AMT.

Table II
Anticipated and actual benefits achieved
Anticipated rank Actual rank
Obtaining competitive advantage 1 21
Reduced costs 2 15
Better management control 3 7
Increased through-put 4 11
Increased flexibility 5 3
Improved quality 6 12
Improved response to variations in product mix 7 14
Improved response to changes in product volume 8 8
Reduced work in progress 9 18
Improved integration of information systems across functions 10 17
Improved integration of manufacturing information systems 11 16
Increased sales 12 19
Reduced change-over/set-up times 13 25
Improved workforce attitudes 14 2
Improved working environment 15 6
Improved ability to respond to engineering changes 16 10
Improved ability to implement engineering changes 17 13
Enhanced company image 18 1
Better working relationships 19 5
Improved management attitudes 20 4
Improved ability to respond to variations in suppliers' lead times 21 20
Reduced product development time 22 23
Overcoming existing technical skill deficiencies 23 22
Widening product range 24 9
Overcoming production management skill deficiencies 25 26
Improved ability to respond to variations in suppliers' quality 26 24

[ 346 ]
Peter G. Burcher and Another issue to be addressed by
Gloria L. Lee companies is the need for a clear articulation
Competitiveness strategies of the financial benefits from an investment.
and AMT investment
decisions As there is always an opportunity cost
involved in any investment, time spent in
Integrated Manufacturing
Systems undertaking sensitivity analyses enables a
11/5 [2000] 340347 company to become clearer about the effects
of changes in project assumptions. Learning
from experience is also important and time
taken on a post-implementation evaluation of
an AMT investment can prevent costly
mistakes in the future.
Key lessons then that arise from the above
aspects of the AMT investment process
are the:
. importance of aligning the AMT and
manufacturing strategy directly with the
business strategy of the company;
. need for a market driven approach to
competitive advantage;
. need for clear articulation of the financial
benefits from the investment; and
. importance of post-implementation
evaluation and learning from experience.
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